Tag Archives: Alliance Magazine

In a recent article for the Guardian,[1] I suggested that if observers were to ‘peer beyond the wreckage of western financial systems’, they could ‘discern the outlines of the future’. I also suggested that the end of the period of ‘global capital markets’ and the ‘financial services revolution’ would usher in a new era of social business and social investment.

Much has been made of the rising level of funds dedicated to social, ethical and environmental businesses and enterprises, but rather less attention given to the businesses themselves (the supply side). Unless the sector pays more attention, I believe this phenomenon will end in tears.

Although the full cost of the financial meltdown is not yet known, initial estimates are likely to prove low and the bill will be picked up by the taxpayer. The debts now being created need to be serviced and eventually repaid. Against this backdrop one can simply forget about expenditure on social programmes. In the face of this challenge, social business and social investment have a big role to play.

Maureen Stapleton writes in this issue of Alliance about the growth of ethically oriented funds. She notes, for example, the doubling in just two years of European SRI Funds to €2.7 trillion. SRI Funds have their place in the ‘ethical arena’, but I believe they also have great limitations – most notably the fact that their portfolios essentially mirror those of mainstream funds. I would point out other even more progressive developments, such as the first closing (at £57 million) in September of WHEB Ventures’ clean tech-oriented second fund. In Canada, Renewal Partners, which has been making social venture capital investments for over a decade, is raising its second fund. In the UK, Bridges will shortly launch the Bridges Charitable Trust, which focuses on ‘equity-like’ capital for social ventures.

Stapleton also mentions UK-based Adili, which has secured funding for its own expansion, while Divine raised funding in the USA for expansion into that market. The Ethical Property Company expects to issue up to £10 million of new share capital in the next 12 months from UK and European investors, to fund future property purchases.

Yet these organizations are exceptions to the rule. While funding has increased substantially, the stock of commercially interesting social and ethical opportunities has failed to increase at the same rate. Statistics on this are impossible to come by, but as a firm that focuses on ‘helping social businesses to succeed’, we believe a great imbalance exists. Investors (in both the private and the public sector) can inject funds at the stroke of a pen, but building great businesses takes time and effort. We are only at the earliest days of this process.

Unfortunately, those firms which do make some progress are often quickly snatched up by buyers. In the UK, the last few years have seen the disappearance of great names such as The Body Shop and Organix Brands (into the clutches of L’Oreal and Hero, respectively), and the purchase of the very large (by social enterprise standards) ECT Group (community transport) by private firm May Gurney (for more UK social businesses see http://www.socialinvestments.com). These and other acquisitions are good for the atmosphere in the sector but will mean fewer high-quality sizeable social businesses to absorb the new capital. If this persists, poor financial returns will follow, thereby discouraging future social venture capital investment.

Two things are needed. First, time – something that few have but which is absolutely essential. Second, capacity building and incubation. There is a general absence of organizations that offer sizeable funds for scaling up. The minor contributions of the likes of Skoll, Ashoka, Acumen and the Schwab Foundation are just too small compared with the capital required.

I have been very impressed with the efforts of the Netherlands-based Noaber Foundation, which has been recycling capital earned in the mainstream (the founders were part of Baan, the successful Dutch software firm) into social businesses. In the government-backed arena, there are few peers for MaRS, a bold and innovative incubator of technology and social firms, based in Toronto, Canada. I am also excited by similar ventures in developing markets. Artemisia, in São Paolo, Brazil, is an impressive social business incubator, which operates in Brazil and in Senegal and France. Recently I have become aware of similar initiatives in other South American and African countries. Perhaps the developing world can show us, in the West, how to do it properly, now that we have faltered?

During the summer of 2007 I spent seven weeks travelling in the nine Balkan countries to meet with and learn from the best social enterprises and social businesses and celebrate their achievements. I set out on this excursion for many reasons, but primary among them was the fact that Catalyst, our company, is focused solely on helping social businesses to succeed, and we were celebrating our 10th anniversary. Also, and perhaps even more importantly, I was celebrating my 50th birthday this year and wanted some special way to mark these milestones. Visiting this war-torn region, and focusing on the best coming out of it, seemed the right way for Catalyst and me to celebrate.

My attraction to the region began four years ago when I first visited Sarajevo. I did not however make any local contacts, so my trip began without any “locals” to visit. On the advice of a very good friend I drafted a two-page note, which described what I was doing, what I hope to get out of the trip and what I hope to give back to the region. I then sent out and received several hundred e-mails. The result was over 100 meetings, a wonderful summer, a fantastic education and an experience that will last a lifetime. My Catalyst colleagues and I sometimes muse that this business of “engaged tourism” is a potentially interesting one in and of itself. And since this trip, we have had offers from many parties looking to be “catalysts in” (the name we gave to these journeys—for more information see http://www.catfund.com/catalyst_in.htm) in other regions.

The political, economic and social context of the Balkans is a particularly challenging one. Without going into a lengthy historical analysis, this adds a degree of complexity western entrepreneurs can only imagine. It is only in Bulgaria and Romania, which have been rebuilding since 1989 and have just entered the EU, where the governments are relatively stable and lack a sort of “wild-west” feel. Elsewhere, in the countries most affected by the aftermath of the bloody 1990s war, there exists a “kleptocracy” of sorts, unsurprising in light of the widespread trauma. This will take years to fix. Corruption is widespread and influences much of economic activity. Furthermore, in several countries, borders imposed by Western powers do not command broad popular support and create an eerie tenuousness. The uncertainty over Kosovo in the aftermath of the recent election is perhaps the best known example. Much less appreciated, but much more worrying in terms of long-term regional impact is Bosnia-Herzegovina, a patchwork of quasi-autonomous regions and the result of an unhappy and unsatisfying compromise still without a final resolution. Yet there is no guarantee that such a resolution will be peaceful.

On a more mundane level, transport links between countries and within countries are appalling. Getting around this mountainous region is extremely difficult, as is getting in and out. Regular flights to and from the major capitals are not frequent and relatively recent. Finally, the international aid picture is highly problematic. The Balkans has been highly dependent on international aid, creating a dependency culture. My non-expert judgment, from the brief encounters I have had with various agencies, is that only some of this aid has been put to good use. In many cases it has been subject to political agendas or the same governmental “influences” which plague the rest of the economy. Furthermore, aid flows are drying up now that the crisis has passed. It is not clear that a sustainable economy is ready to take up the slack.

There exist some large domestic businesses which owe their allegiance to certain politicians. They provide jobs, but their sustainability is unclear as they remain immune from normal market forces. International firms have arrived, taking advantage of cheap, skilful labour and this has made a difference. Many also practice some form of corporate social responsibility, and this has been a positive force in the domestic economies.

Social businesses and social enterprises have sprung up and in many cases have prospered. I found quite a few in the organic food sector. This is unsurprising, as the Mediterranean climate and large tracts of arable land make this a highly suitable industry. Organic farming has been practiced here for centuries because, as the locals point note, “we could not even afford the chemicals if we wanted them.”

SMS, based near Split, Croatia, is a very good example of such an organization. Although they are only now completing the process of organic certification to qualify for certain Western markets, they have been involved in organic food production since 1989, when they were founded by Srdjan Mladinic. The company combines attractive packaging with high-quality food products and has developed increasingly loyal following in Western markets and has just established a relationship with one of Croatia’s largest food companies, Podravka. (All the companies mentioned can be found via www.catfund.com/balkans).

Across the region, in Sofia, Bulgaria, operates Gorichka. Begun by a serial social entrepreneur, Lubomir Nokov, this is an organic marketing company, finding markets for Bulgaria’s many small organic food producers. This is a relatively new company with enormous potential. This is in no small part due to the fact that the principals have already built a commercially successful tennis club, with strong green credentials, and a high street fashion outlet.

Eco-tourism is also enjoying considerable growth in the region. These companies offer sustainable tourist experiences largely to “green” Westerners. The two best examples of these I came across were in Bosnia and Montenegro. Operating out of Sarajevo, Tim Clancy and Thierry Joubert run Greenvisions. This is an ecotourism company, which also provides summer camp opportunities for both local and foreign youth, is an advocacy group in the region for sustainable tourism and is in the process of developing appropriate and green tourist accommodation for Western visitors. They are an extraordinary energetic company—and have embarked upon a project to create a pan-regional affiliation of ecotourism firms, who will create what they hope will become a new pilgrimage route—the “Via Dinarica”. Montenegro Adventures, run by Slavica Vukcevic, was actually spawned by a development agency called CHF International. They are successfully developing Montenegrin sustainable tourism and are working in partnership with Greenvisions to create the Via Dinarica.

I could mention more social enterprises—run by extraordinary individuals operating in very difficult circumstances. They do exist and are thriving in the region. They also may offer particularly useful solutions to the problems of the Balkans. First and foremost, their social mission provides them with the purpose that keeps them going, helps offset the low wages they inevitably pay and is the “glue” that holds them together despite the most difficult circumstances. Secondly, by being outspoken on social and ethical issues and practicing what they preach, such businesses are widely respected for not being part of a corrupt economic system—this greatly assists their visibility. Thirdly, they operate at a size which enables him to be very flexible and responsive to changing market circumstances and needs. In addition to flexibility, being small means they tend to operate “below the radar” of government officials and thus remain relatively clear of the sort of influences which could subvert their purposes. As time goes on, of course, and if they become very large and successful, their ability to continue to operate freely will come into question, although hopefully, political circumstances will have greatly changed by then.

Social businesses and social enterprises also benefit from what Nejira Nalic, of micro-finance firm Mi-Bospo describes as the “thoroughly liberating nature of commercial activity.”. Having been largely dependent, as a small but rapidly growing firm in Tuzla, Bosnia, she despaired at all the “handouts” on which she relied to keep the business going. As the organization grew and became increasingly professional in nature, and profitable, Nejira began to engage with large international funders, not as a recipient of aid, but as an equal partner in a commercial transaction. Put simply, they could buy her profitable loan book or not. If the price was right, she would sell and if not she would look for another purchaser. To Nejira, this new feeling of economic empowerment has been immensely motivating, both for her and for her staff.

By far and away the most impressive, and most effective of the social businesses I encountered was the radio station and now media enterprise B-92, operating from Belgrade, Serbia. A small, and relatively unknown commercial radio station found itself becoming the “conscience of the nation” during the Milosevic era. Unwilling to “fly under the radar” of the government, Veran Matic and his colleagues flew directly into oncoming traffic, with nearly catastrophic results. They received death threats, their equipment was destroyed several times, and yet they persevered and continue to broadcast throughout the war. I did not meet anybody in the region who was not familiar with them, and nearly everyone noted that during the war, they provided hope and the truth to Serbians, and ultimately assisted in bringing down the government. Today they have become a successful media business, but have not lost their edge, focusing on issues such as domestic violence, the need to give blood, and the importance of racial and ethnic tolerance. They both highlight these issues, and act as a catalyst in fund raising efforts to support related causes.

So when observers wonder, what social enterprises or social businesses can actually achieve, I urge them to consider companies like B-92.

‘Absolutely not!’ ‘No, I certainly would not include them.’ These are typical of the surprisingly forceful and unambiguous replies to the question, ‘is Justgiving a social enterprise?’ For those of you who have not heard of it, Justgiving is a privately held company that has become Europe’s largest online giving website. I was involved with the business from 2003 until this March (when I stepped down as Chairman), and in this capacity have put the question to several well-known experts from the social enterprise sector.

But consider. Justgiving will enable well over £70 million to find its way from donors to charitable causes this year. A substantial portion of this flow of money to charities would not have happened otherwise. This financial impact places the company on a par with the UK’s largest charities, some of which are decades old, in contrast with Justgiving, which began in 2000. The firm employs an ethnically diverse staff, is run by two women (still unusual among businesses) and formally considers the broad spectrum of stakeholders (not only shareholders) in its actions. Beyond the cash it raises for charities, Justgiving helps them by promoting their message, reducing back-office costs, and boosting their online fundraising efforts.

The ownership question

There is, of course, a lack of agreement on what exactly constitutes a social enterprise. Is it what an enterprise does or does not do, where it does it, how it does it, why it does it, or who does it? Justgiving, according to the experts, stumbles on a different hurdle – how the company is owned. The disqualifying factor is that its investors may profit handsomely from its success. This, they believe, trumps any other consideration and is the quintessence of all that is wrong with our economic system.

In my own view, Justgiving is very much a social enterprise. More importantly, its capital structure allows substantial wealth accumulation, and it may well be this that has led it to be more successful than it would have been otherwise, and so to generate that much more in social benefits.

The saga of The Body Shop may be instructive in this regard. Commentators were outraged by their sell-out to L’Oreal. Yet, as I argued elsewhere (see Guardian Unlimited, 30 June 2006), this event is in fact likely to be a substantial boost to social businesses. The sector is in need of commercial success stories which encourage other investors. And, given the history of the Roddicks, much of the £100 million plus heading into their hands is likely to wind up in social enterprises.

The growth of Justgiving

Justgiving has similarly been very successful. Since 2003 the charitable flow has increased from approximately £2 million to an expected level of over £70 million in 2006. This astonishing growth rate has been matched in revenues and a seven-digit loss is budgeted to become a seven-digit profit. In addition to becoming the dominant UK provider, Justgiving has expanded into the USA (a too-rare example of innovative business models moving westward), enjoying extraordinary growth there as well.

Close observers attribute Justgiving’s success to very easy use of the website. I have yet to meet a person who has not made this comment (and I have asked many), and Justgiving’s own research documents a high rate of customer satisfaction with its core product offering (an easy, quick and simple way to donate to charity over the internet). The company also benefits from a deep understanding of the customer experience and a clear knowledge of exactly who the customers actually are (the latter taking many years to refine). This high customer satisfaction and related ease of use is the result of ruthless examination and testing of every minute aspect of its offering. I have found this at Justgiving and other profit-seeking companies but rarely in enterprises where the wealth accumulation motive is absent.

As with all start-ups, effective cost control has been very much in evidence. Furthermore, compared with other dotcoms, Justgiving frittered away little of its resources on wasteful mass marketing. The CEO is also an astute judge of which new initiatives represent fantastic opportunities and which will just eat up valuable time. This heightened sensitivity to waste and aggressive resource management is also typical of profit-seeking entrepreneurs I have observed. By contrast, I have found others in the charitable or social sector to be at times more relaxed about expenditure. Lastly, but perhaps most importantly, the CEO has selected an excellent team which complements her own considerable strengths very well.

Why for-profits might have an edge

Justgiving’s remarkable growth has not gone unnoticed by competitors in the UK and overseas. CAFonline, which is part of the Charities Aid Foundation (CAF), operates in the same marketplace but has enjoyed far less growth. While detailed figures are not available, we have been told that since its inception when was this?, £29 million has been transacted through CAFonline accounts, in contrast with Justgiving’s total of £35 million in 2005 alone. Given the divergent growth rates, this gap is likely to increase.

Few would deny that CAFonline is a social enterprise and many would also agree it has been successful. Yet the gap in performance between it and Justgiving is too great to ignore. Close observers of social enterprise thus need to address a fundamental question: is there something which profit-oriented models bring to the social enterprise sphere which may, in certain cases, create incremental social value? In raising this question I am assuming that more donations to charitable causes equal more social value. This is admittedly only one dimension of social value, but few would deny that more money to charity is better than less.

This is not to say that CAFonline does not make an important contribution as a social enterprise. Its goal is not to earn profits (CAF itself seeks to break even) but to enable and increase funds going to the charitable sector and bring donors and charities together. In doing so, it works with more charities than Justgiving does (permitting access to approximately 220,000). CAFonline perhaps does so because of the social impact of such a service, which is consistent with its mission, and its ‘paid for’ services enable it to reinvest in free services for charities. Justgiving, with its different objectives, would not take on any clients that would be unlikely to enhance profitability overall.

Without going into the relative quality of the work the two organizations do, it is clear that the differences in their objectives result in different behaviour. The two organizations have different goals, perform different roles and generate different results. Both increase social value. Given the explicit objective of generating maximal growth in online charity giving, a worthy goal by most yardsticks, the Justgiving model appears to work better. Professionals with an interest in fostering social enterprise are doing the sector a disservice by excluding it from consideration.

Conclusion

Profit-seeking companies, of course, do not always grow faster or perform better. Bmycharity, another UK-based private company active in the sector, is substantially smaller, with £7 million in donations since its inception, although it was profitable before Justgiving. The far larger US-based Kintera has lost money consistently (in the first quarter of 2006 it reported a net loss of $9.3 million on revenues of $10.7 million). But none of this undermines the argument that the for-profit model should be considered a potential producer of social benefit.

We in the UK social enterprise sector need to explore varied models to achieve our social objectives. By eliminating those that seek a profit we disadvantage the sector and discourage badly needed capital from entering. I think we should applaud successful fast-growth businesses like Justgiving, which also generate social value.